LIABILITY INSURER’S DUTY TO DEFEND INSURED IS BROADER THAN ITS DUTY TO INDEMNIFY

When it comes to liability insurance, an insurer’s duty to defend its insured from a third-party claim is much broader than its duty to indemnify.   This broad duty to defend an insured is very important and, as an insured, you need to know this.   “A liability insurer’s obligation, with respect to its duty to defend, is not determined by the insured’s actual liability but rather by whether the alleged basis of the action against the insurer falls within the policy’s coverage.”  Advanced Systems, Inc. v. Gotham Ins. Co., 44 Fla. L. Weekly D996b (Fla. 3d DCA 2019) (internal quotation omitted).  This means:

 

Even where the complaint alleges facts partially within and partially outside the coverage of a policy, the insurer is nonetheless obligated to defend the entire suit, even if the facts later demonstrate that no coverage actually exists.  And, the insurer must defend even if the allegations in the complaint are factually incorrect or meritless.  As such, an insurer is obligated to defend a claim even if it is uncertain whether coverage exists under the policy.  Furthermore, once a court finds that there is a duty to defend, the duty will continue even though it is ultimately determined that the alleged cause of action is groundless and no liability is found within the policy provisions defining coverage.

Advanced Systems, supra(internal citations and quotations omitted).

 

In Advanced Systems, an insurer refused to defend its insured, a fire protection subcontractor.   The subcontractor had been third-partied into a construction defect lawsuit because the foam fire suppression system it installed had a failure resulting in the premature discharge of foam.  The owner sued the general contractor and the general contractor third-partied in the subcontractor.  However, the subcontractor’s CGL carrier refused its duty to defend the subcontractor from the third-party complaint because of the pollution exclusion in the CGL policy.  In other words, the insurer claimed that the foam the subcontractor installed constituted a pollutant within the meaning of the exclusion and, therefore, resulted in no coverage and, thus, no duty to defend the insured in the action.  

 

To determine the foam was a “pollutant”–which the policy defined as any “solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste”—the insurer relied on extrinsic evidence, specifically the Material Safety Data Sheet (MSDS Sheet) for the foam.   The insured objected to the insurer’s reliance on extrinsic evidence since it was beyond the scope of the insurer’s duty to defend which should be based on the allegations in the underlying complaint.  (The insurer tried to support its reliance on extrinsic evidence under a very limited exception that supports the reliance on extrinsic facts to form the refusal to defend when the extrinsic facts are uncontroverted and manifestly obvious, not normally alleged in the complaint, and that place the claim outside of coverage.  However, this is a very narrow exception that the court was not going to apply here.) 

 

It is important to consult with counsel if you have an issue with your insurer refusing to defend you in an underlying action and/or your insurer denies coverage.

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

CGL POLICY COVERING ATTORNEY’S FEES IN PROPERTY DAMAGE CLAIMS

shutterstock_195189626Does a CGL policy cover attorney’s fees and costs in property damages claims, to the extent there is a contractual or statutory basis to recover attorney’s fees? Naturally, you need to review the policies and this is not a clear-cut issue, but there is law to argue under.  

 

A case I have argued in support of CGL policies providing for coverage for attorney’s fees as a component of property damage claims when there is a contractual or statutory basis is Assurance Co. of America v. Lucas Waterproofing Co., Inc., 581 F.Supp.2d 1201 (S.D.Fla. 2008).  In this case, the following applied:

 

-The policy provided coverage for “those sums that the insured becomes legally obligated to pay as damages of… ‘property damage’….

– Property damage was defined as “physical injury to tangible property, including all resulting loss of use of that property.”

-The term damage, in of itself, was not defined in the policy.

 

The trial court looked at whether  attorneys’ fees and costs are damages arising because of ‘property damage’ to which the insurance policy at issue applies.  

 

If an insurer may defend against a claim that is covered by the policy without taking into account potential attorneys’ fees and costs that will be awarded if the opposing party prevails, the insurer creates an externality whereby, in the course of seeking to minimize its own liability, it imposes potential costs on the insured at no additional cost to itself.  This externality undermines the very reason why an insurer can at once possess a duty and a right to defend, which is that the interests of the insured and the insurer are presumed to be aligned with respect to a claim for damages covered by the policy.  Every dollar of liability for a covered claim for which the insured cannot be held liable is a dollar saved by the insurance company.  If, however, when defending against a claim that is covered by the policy, an insurer can increase the liability of the insured while simultaneously decreasing its own liability, the interests of the insurer and insured are no longer aligned, giving rise to a conflict between the insurer and insured and making the coexistence of the right and duty to defend untenable. 

***

Therefore, this Court finds that attorneys’ fees and costs that an insured becomes obligated to pay because of a contractual or statutory provision, which are attributable to an insurer’s duty to defend the insured against claims that would be covered by the policy if the claimant prevails, constitute damages because of ‘property damage” within the meaning of a CGL policy.

Assurance Co. of America, 581 F.Supp.2d at 1214-15. 

 

In July of 2018, the Ninth Circuit Court of Appeals reached a similar conclusion in Association of Apartment Owners of Moorings, Inc. v. Dongbu Insurance Co., Ltd., 731 Fed.Appx. 713 (9thCir. 2018). The issue on appeal was whether the liability insurer was required to indemnify its insured for attorneys’ fees its insured was ordered to pay against a third-party that prevailed on a water damage claim.  Similar to above, the policy did not define the term “damage” and the Ninth Circuit explained:

 

The policy provides coverage for damages Moorings [insured] must pay “because of” covered property damage.  This phrase, which is undefined, connotes a non-exacting causation requirement whereby any award of damages that flows from covered property damage is covered, unless otherwise excluded.  The Bradens [third-party claimant] were awarded fees…because their home incurred water damage, and they incurred additional loss in order to recover for this damage.  The fee award is thus properly considered an award of damages that Moorings must pay “because of” that covered property damage and is not otherwise excluded. 

Association of Apartment Owners of Moorings, Inc., 731 Fed.Appx. at 714.

 

 

 

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

CONTRACTORS: CONSULT YOUR INSURANCE BROKER REGARDING YOUR CGL POLICY

shutterstock_601853483Contractors:  do yourself a favor and consult your insurance broker regarding your commercial general liability (CGL) policy.   Do this now, especially if you subcontract out work.

 

CGL policies contain a “your work” exclusion.  The CGL policy is written such that it excludes “‘property damage’ to ‘your work’ arising out of it or any part of it and included in the ‘products-completed operations hazard.’” This exclusion will be raised in the post-completion latent construction defect scenario. (There are other exclusions that will be raised to a defect discovered during construction.)  Certain policies will contain a subcontractor exception to this “your work” exclusion.  You WANT this exception- no doubt about it so that this exclusion does not apply to work performed by your subcontractors.  Without this subcontractor exception, truth be told, this “your work” exclusion is a total back-breaker to contractors.   It will give your insurer an immediate out for many latent defect property scenarios since excluded from coverage is property damage to your work including work performed by your subcontractors.

 

In a recent opinion, Mid-Continent Casualty Co. v. JWN Construction, Inc., 2018 WL 783102 (S.D.Fla. 2018), an owner discovered water intrusion and damage at his property.  He sued the general contractor and the general contractor’s insurer filed a separate action for declaratory relief claiming it had NO duty to defend or indemnify its insured—the general contractor—in the underlying suit.  The court agreed because the contractor did not have the subcontractor exception to the “your work” exclusion.

 

If work was performed by JWN [contractor] or on JWN’s behalf-here by a subcontractor-then the “your work” exclusion applies.  Historically, insurers could be liable under commercial general liabilities policies resembling the policy in the instant case for certain types of damages caused by subcontractors….Nonetheless, insurers do possess the right to define their coverage as excluding damages arising out of a subcontractor’s defective work by eliminating subcontractor’s exceptions from the policy. An insurer is only liable for a subcontractor’s defective work when the “your work” exclusion does not eliminate coverage for work performed by a subcontractor….In conclusion, the insurance policy in this case excluded coverage for work performed not only by JWN, but also by JWN’s subcontractors.

JWN Construction, Inc., supra, at *4.

 

 

This ruling meant that the general contractor’s CGL insurer had no duty to defend or indemnify its insured—again, the contractor—for the defects or resulting water damage.  A total killer illustrating the absolute importance of the subcontractor exception to the “your work” exclusion in your CGL policy.

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

CGL INSURER’S DUTY TO DEFEND INSURED DURING PRE-SUIT 558 PROCESS: MAYBE?

shutterstock_287900015In earlier postings, I discussed the issue of whether Florida Statutes Chapter 558’s pre-suit construction defects process triggers a CGL insurer’s duty to defend.  The issue was whether Florida’s 558 pre-suit notice of a construction defect and repair process met the definition of “suit” within a standard CGL policy.

 

A standard CGL policy defines the term “suit” as:

 

“Suit” means a civil proceeding in which damages because of “bodily injury,” “property damage” or “personal and advertising injury” to which this insurance applies are alleged. “Suit” includes:

a. An arbitration proceeding in which such damages are claimed and to which the insured must submit or does submit with our consent; or

b. Any other alternative dispute resolution proceeding in which such damages are claimed and to which the insured submits with our consent.

 

The Florida Supreme Court in Altman Contractors, Inc. v. Crum & Forster Specialty Ins. Co., 42 Fla. L. Weekly S960b (2017) held that Florida’s 558 process is an “alternative dispute resolution proceeding” within the definition of suit in a CGL policy.  However,  since it falls within an “alternative dispute resolution proceeding,” the insurer’s consent is required to invoke its duty to defend its insured during this pre-suit process.  This is especially true since a recipient’s participation in the pre-suit 558 process is voluntary and not mandatory and this process does not produce any binding results.

 

Accordingly, an insured-contractor or subcontractor that receives a 558 notice of a construction defect should absolutely tender the notice to its CGL insurer.  No doubt about it.  In doing so, the insured should inquire and perhaps encourage the insurer to participate in the process and defend the insured’s interests.  If the insurer is not willing to participate in this process, this does not mean the insured should refuse too.  Rather, the insured simply needs to recognize that it will be responsible for its own fees and costs in doing so.  The insurer’s consent is required to invoke its duty to defend the insured during this process.

 

This opinion, unfortunately, doesn’t provide a whole lot of value (in my opinion) because if an insurer does not consent to participating in the process and defending its insured, it puts the insured in a position where it may be better off being sued where the insurer will now defend it and engage the consultants to investigate the claimed defects.  Many insurers, however, will capitalize on the 558 process by providing a defense to its insured as opposed to simply waiting for the inevitable construction defect lawsuit.

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

ADDITIONAL INSURED OBLIGATIONS AND THE UNDERLYING LAWSUIT

images-1As a general contractor, you understand the importance of being named an additional insured under your subcontractors’ commercial general liability (CGL) policies.   Not only do you want your subcontract to express that a subcontractor’s CGL policy is primary and noncontributory to your policy, but you want it to express that the subcontractor must identify you as an additional insured for ongoing and completed operations.  Even with this language, you want the subcontractor to provide you with their additional insured endorsement and, preferably, a primary and noncontributory endorsement.    These additional insured obligations are important to any general contractor that has been sued in a construction defect / property damage lawsuit.

 

In the recent decision in Core Construction Services Southeast, Inc. v. Crum & Forster Ins. Co., 2016 WL 5403578 (11th Cir. 2016), a general contractor built a residential development.  The general contractor required its roofing subcontractor to identify it as an additional insured under the roofer’s CGL policy.   The general contractor was sued with the lawsuit asserting that the roofs were installed incorrectly.  The general contractor tendered the defense of the claim to the roofer’s CGL insurer and the insurer refused to provide the defense because there was no “property damage” within the definition of the CGL policy (“physical injury to tangible property…”).    The general contractor then filed a lawsuit against the subcontractor’s insurer arguing that the insurer was obligated to defend and indemnify it since the general contractor was an additional insured under the subcontractor’s CGL policy.  The trial court, and as affirmed by the Eleventh Circuit Court of Appeal, held that the insurer owed no duty to defend or indemnity the general contractor because there was NO asserted property damage within the meaning of the policyIf there was no property damage then there was no obligation for the roofing subcontractor’s insurer to defend the general contractor as an additional insured under the subcontractor’s CGL policy. 

 

The underlying lawsuit only claimed that the roofs had been damaged but did NOT claim that the defective roofs had caused damage to other property (other components of the building).  The omission of this assertion was important because the complaint was not pled to trigger insurance duties, such as additional insured obligations, since the cost to repair or replace the damaged roof would not be covered by the subcontractor’s CGL insurer.  Rather, costs to replace or repair damage caused by the subcontractor’s defective roofing installation would be covered; however, such damage was not pled in the underlying complaint.   Remember, the insurer’s duty to defend is only triggered based on allegations in the underlying complaint so without such allegations, there is no duty

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

CONSTRUCTION DEFECT INDEMNITY OBLIGATIONS – COVERED VS. NON-COVERED CGL CLAIMS

If you are a contractor or subcontractor and a construction defect claim is asserted against you, then you have tendered such claim to your commercial general liability (CGL) insurer.  No doubt about it.  In doing so, you have wondered whether your CGL insurer will indemnify you for the damages asserted against you by the third-party.  You have wondered whether the damages asserted against you are covered by your CGL policy.   If you have not wondered and asked these questions, then you should!  Below is a portion of a presentation I recently put on regarding construction defect indemnity obligations under CGL policies and, particularly, covered claims versus non-covered claims.  

 

Download (PDF, 195KB)

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

QUICK NOTE: CGL INSURER LIABLE FOR ATTORNEY’S FEES IF IT UNJUSTIFIABLY REFUSED TO PROVIDE YOU DEFENSE

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If your CGL (or liability) insurer unjustifiably refuses to provide you a defense in a lawsuit, the insurer is liable for the reasonable attorney’s fees and costs you incur in defending that lawsuit.  The operative word is “unjustifiably.”  For instance, if you get sued and your CGL insurer refuses to provide you a defense and you retain private counsel to defend you, the CGL insurer will be liable for your attorney’s fees and costs if it should have provided you a duty defend in connection with that suit.  Of course, on the other hand, if the CGL insurer justifiably refused to defend you (based on the allegations in the lawsuit / claim and coverage under the policy) then it will not be liable for your reasonable attorney’s fees and costs.

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

MAKE SURE YOU HAVE THE SUBCONTRACTOR EXCEPTION TO THE “YOUR WORK” EXCLUSION

imagesI previously discussed the importance of the subcontractor exception to the “your work” exclusion in CGL policies (exclusion l) for contractors and subcontractors that subcontract out scopes of work.  Without this exception, the CGL policy provides minimal (and I mean minimal) coverage for property damage associated with construction defects.  If you are involved in construction, you categorically need to make sure there is a subcontractor exception to the “your work” exclusion in your CGL policy.  The subcontractor exception to the “your work” exclusion is the language bolded below that negates the application of the exclusion:

 

 

 

This insurance does not apply to:

 

l. Damage to Your Work

 

 

“Property damage” to “your work” arising out of it or any part of it and included in the “products-completed operations hazard”.

 

This exclusion does not apply if the damaged work or the work out of which the damage arises was performed on your behalf by a subcontractor.

 

The Middle District in Auto-Owners Ins. Co. v. Elite Homes, Inc., 2016 WL 409577 (M.D.Fla. 2016) recently issued an opinion involving the application of the “your work” exclusion in a homebuilder’s CGL policy that did not have the subcontractor exception (the language bolded above).  Ouch!!!!  Without this exception, the policy excluded from coverage “property damage to your work arising out of it or any part of it and included in the products-completed operations hazard.”  Elite Homes, supra, at *2.  But again,there was no subcontractor exception that negated the application of this provision to work performed by a subcontractor.

 

What is the impact of not having the subcontractor exception to the “your work” exclusion?  This case explains.  The owners sued the homebuilder for water intrusion and damage from window defects.  The complaint alleged that the leaky window(s) caused damage to drywall, insulation, interior finishes, wood frame, and sheathing.    The homebuilder’s CGL insurer denied the homebuilder a defense and coverage based on the “your work” exclusion—the owner alleged damage to the homebuilder’s work (the structure of the home) but nothing else.  The Middle District concurred that the water damage alleged in the owner’s complaint arose out of the homebuilder’s work and was damage to the homebuilder’s work (the home).  Hence, the “your work” exclusion barred coverage for the owner’s construction defect lawsuit against the homebuilder.

 

This opinion is painful because it illustrates the non-value the CGL policy provided to the homebuilder for property damage associated with defective windows.  This outcome was the result of a CGL policy that eliminated the subcontractor exception to the “your work” exclusion.  If the policy had this subcontractor exception, then there would have been coverage for the water damage caused by the defective windows and the homebuilder’s CGL insurer would have been obligated to defend the homebuilder in the owner’s lawsuit.  The homebuilder would have been able to say that it hired a glazer (subcontractor) that performed the window installation and the glazer’s defective window installation caused damage to other subcontractors’ work.  

 

Make sure to review your CGL policy.  If you do not have the subcontractor exception to the “your work” exclusion, the outcome in this case could likely be the outcome in your case dealing with property damage caused by defective construction.  Consult with your insurance broker because this subcontractor exception to the “your work” exclusion is a must in construction!  

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

 

 

QUICK NOTE: HAVE YOU SEEN THE “SEPARATION OF INSUREDS” PROVISION IN YOUR CGL POLICY?

imagesHave you ever looked at your CGL policy and seen the “Separation of Insureds” provision? You must have seen it but perhaps it does not ring a bell.  If you are an additional insured under another’s policy or have additional insured under your policy, this is an important provision.  Check out this article to understand the application of the “Separation of Insureds” provision in your CGL policy. 

 

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

CGL INSURER LIABLE FOR ATTORNEY’S FEES JUDGMENT AGAINST INSURED

images-2Commercial general liability (CGL) policies contain a section called “Supplementary Payments – Coverages A and B.”   This section states in relevant part:

 

 

1.  We [insurer] will pay, with respect to any claim we investigate or settle, or any “suit” against an insured we defend:

            e.  All costs taxed against the insured in the “suit.”

 

In the recent decision, Mid-Continent Casualty Co. v. Treace, 41 Fla. L. Weekly D60c (Fla. 5th DCA 2015), an owner obtained a judgment against its contractor in a construction defect case.  The court then entered a judgment for attorney’s fees and costs in favor of the owner.  The owner then initiated a proceeding against the contractor’s CGL insurer to recover the judgments.  The trial court refused to allow the owner to recover its attorney’s fees against the insurer and the owner appealed.  On appeal, the Fifth District examined the above language in the contractor’s CGL policy that said the insurer would pay for “[a]ll costs taxed against the insured in the ‘suit.’”   In examining this language, the court found that the language “‘all court costs’ could be read to include attorney’s fees, especially since there was no definition of that term in the policy…[T]he insurer did not, but could have, defined ‘court costs’ to specifically exclude attorney’s fees.”  Treace, supra.    For this reason, the court held that the attorney’s fees judgment was recoverable by the owner against the contractor’s CGL insurer.

 

This case provides a strong argument for a claimant that recovers a judgment against an insured in a construction defect lawsuit that includes attorney’s fees that attorney’s fees are recoverable under the insured’s CGL policy. 

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.